What Is a Third-Party Payment Processor?

Running a business comes with a whole set of tasks and potential difficulties even for the most successful companies. One of the many necessities that small and medium-sized businesses (SMBs) encounter is payment processing. Thanks to checks, credit cards and debit accounts, gone are the days when cash was king. Fortunately, utilizing a third-party payment processor can simplify your revenue stream.

Definition of Third-Party Payment Processor

Before you can truly decide if a third-party payment processor is right for you, it helps to know exactly what they are. Many businesses have their own merchant accounts with merchant services providers. When their clients walk through the door and make a purchase, these businesses can process a payment directly through their own account and be done.

However, for some businesses who are just starting out, this isn’t always the most economical method of taking payments. This is where a third-party payment processor comes into play. Instead of having your own merchant account, which often comes with setup costs, you’ll work with a third party who has their own relationship with a merchant services provider. An example of a third-party payment processor is Square, you are able to sign up and start accepting payments the very same day.

By utilizing a third-party payment processor, you’ll be bypassing the step of having your own merchant account at a bank. These processors allow you to use their merchant account to process all of your payments. Your clients’ payment information will be reviewed by the processor, along with running a variety of anti-fraud measures, before allowing completion of the transaction.

Are Third-Party Payment Processors Necessary?

Many budding entrepreneurs, especially those who are just starting out, wonder whether a third-party payment processor is the right fit for them. After all, they hear that sign up is easy and they won’t have to pay any fees. However, it’s important to dig a little deeper to understand who third-party payment processors truly work for and when they are necessary.

There are a variety of reasons a merchant might choose to go with a third-party payment processors. Some companies might not be able to afford the monthly fees associated with dedicated accounts. Similarly, SMBs processing very low volume can often not afford the setup costs of such an account. This makes a third-party payment processor a good solution for your business when you are just starting out and do not anticipate processing a high volume of credit card transactions.

It is important to remember, however, that while you do not pay startup fees or monthly fees with a third-party payment processor, they still have to make money somewhere. They make up for their lack of fees in their per transaction percentage fee. This fee is significantly higher than it would be with a dedicated merchant account. This means that if you are processing high volume, a third-party payment processor will more expensive for you.

Do I Need a Third-Party Payment Processor?

Just because third-party payment processors are available doesn’t mean they’re necessarily the right choice. For most small and medium-sized businesses, the negatives can outweigh the positives when it comes to a third-party payment processor. If your company is at the point where the startup costs are negligible and your stream of clients is large enough to quickly outweigh those costs, a merchant service provider that offers a dedicated merchant account is probably your best bet. Additionally, working with a provider such as Fattmerchant means you will never see any startup costs and the 0% markups will counteract the monthly membership.

The biggest downfall with processing through a third-party payment processor is the lack of security. When you have your own dedicated merchant account, your business has gone through the process of underwriting and you are protected against fraudulent transactions and you know exactly when to expect the funds in your account. If you are processing with a third-party payment processor, however, you do not have this security. Transactions can be held any time the processor feels that the payments might be fraudulent. This makes it impossible for you accurately depict your cash flow and for many SMBs this is a deal breaker.

If you’re running an SMB, you need a way to process payments. Third-party payment processors can make your first foray into accepting credit cards a simple process with minimal hassle. Whether you’re seeking out your first merchant processor or finally understand how to make a more informed decision, you’re on your way to reduced fees and a better payment processing experience.